Time for a New Financial Plan?
The market’s wild ride after the presidential election might have you wondering if a change in leadership should mean a change in your financial strategy.
While no one can ever predict with certainty what will happen to the market – or even on Twitter these days – there are two important points to remember.
It Matters Less than We Think
The first is that there has been a long-term upward movement in the market through many changes of administration.
Ironically, who’s in the White House makes less difference than we think it will in terms of overall market performance: markets are driven by market conditions more than by the policies individual Presidents advocate. As Barry Ritholz noted in an excellent piece in the Washington Post last week, during President Grover Cleveland’s first term stocks rose 53 percent while in his second term they fell 2 percent. That wasn’t because President Cleveland forgot how to make stocks go up – it was overall market drivers that made a difference. So for medium and long-term goals – like saving for retirement or your children’s education – taking the long view with your investments is critical.
How Much Risk is Too Much?
The second point is that everyone has a different level of risk tolerance.
That is why it’s critical that you have access to a sophisticated risk tolerance tool that really drills down to who you are, instead of only generic questions about age, income and whether or not you call yourself “aggressive” or “cautious.”
If you’re risk adverse and you’re anxious about a crash or a downward trend that may affect your short term plans, you can always use January to re-balance your portfolio and lock in profits. As a wise investor once said: “no one ever lost money taking a profit.” If your risk tolerance is higher, you can view the volatility as an opportunity to maximize the possible potential for your investments. By continuing to contribute regularly to a savings or investment plan, you take advantage of the power of dollar-cost averaging and compounded interest to make your money work for you. If you had sold in the sharp downturn last January, for instance, instead of sticking to your plan, you would have lost out on the dramatic returns afterwards.
Of course every January is a good time to meet with your advisor to rebalance your portfolio based on your own changing circumstances, tax needs, and risk tolerance. But, fundamentally, your plan is still your plan, no matter who wins the presidential election. Your goals are still your goals and compound interest still compounds. If you have worked with a good – fiduciary, fee only – financial advisor to create a workable plan based on your life goals and your circumstances, then staying the course – with minor adjustments – is very often the smartest plan. Data overwhelmingly shows that it’s “slow and steady” investing – not playing a guessing game by jumping in and out of investments – that ultimately wins the race.
What is a Financial Plan?
The Importance of Personal Finance Knowledge
Financial Planning for Millennials: Overcoming the Fear Factor
This article was originally published on Investopedia.com
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